Cree, MercadoLibre convertibles in focus in primary market; Illumina adds to gains

By Abigail W. Adams

Portland, Me., Aug. 21 – The convertibles primary market kicked the week off in high gear with plans to price $1.3 billion over two deals after the market close on Tuesday.

MercadoLibre Inc. plans to price $800 million of 10-year convertible notes, and Cree Inc. plans to sell $500 million of five-year convertible notes.

While MercadoLibre’s deal looked cheap based on underwriters’ assumptions, Cree’s new offering modeled rich, sources said. However, both deals were expected to perform well.

With the primary launching $1.3 billion during the summer doldrums, a historically slow time for capital markets, the new deal pipeline was in focus with speculation the calendar will be robust post-Labor Day, a market source said.

All eyes were on the new deals set to price after the market close, with trading volume in the secondary space light. There was about $26 million bonds on the tape early in the session and about $263 million in the late afternoon, sources said.

Illumina Inc.’s new 0% convertible notes due 2019 continued to dominate trading activity with the notes again making gains.

Lam Research Corp.’s 2.625% convertible notes due 2041 were also active on Tuesday as the notes are dropped from the Thomson Reuters convertible indices.

MercadoLibre looks cheap

MercadoLibre plans to price $800 million of 10-year convertible notes after the market close on Tuesday with price talk for a coupon of 1.5% to 2% and an initial conversion premium of 35% to 40%, according to a market source.

The deal is being marketed with a credit spread of 325 basis points over Libor and a 40% vol., a market source said.

One source pegged the deal 2.83 points cheap at the midpoint of talk. Another source pegged the deal about 1 point cheap.

The assumptions looked fair to some sources.

The Buenos Aires-based e-commerce company would have a much tighter credit spread if it was based in the United States, a market source said.

While the company “got clocked” on the exchange rate last quarter, its books look good, the source said.

Argentina also has a much more stable economy than some of its neighbors to the north, such as Brazil or Venezuela.

However, other sources questioned if the assumptions fully compensated for the emerging market risks associated with the deal.

The 10-year structure was also pointed to as a drawback.

However, the borrow on the company stock is good, a source said.

The company intends to use proceeds to repurchase, exchange or otherwise retire its 2.25% convertible notes due 2019.

The new offering is geared toward to the top holders of MercadoLibre’s outstanding convertible notes, who will most likely do an exchange, a market source said.

The 2.25% notes changed hands on Tuesday at 262.82, according to Trace data. MercadoLibre stock closed Tuesday at $328.16, an increase of 2.63%.

Cree looks rich

Cree plans to sell $500 million of five-year convertible notes after the market close on Tuesday with price talk for a coupon of 0.375% to 0.875% and an initial conversion premium of 30% to 35%, according to a market source.

The deal is being marketed with a credit spread of 225 bps over Libor and a 35% vol., a market source said.

Based on those assumptions, the deal modeled about 0.5 point rich. Other sources pegged the deal about 0.75 point rich to 0.125 point rich.

However, the borrow on the company’s stock is decent and the deal is expected to do well, a market source said.

Illumina in demand

Illumina’s recently priced 0% convertible notes due 2019 continued to climb in active trading in the secondary space on Tuesday. The notes were seen changing hands at 104.75 early in the session.

They traded up to 105.625 bid, 106.125 offered in the afternoon with stock up about 1.7%.

More than $31 million of the bonds were on the tape by late afternoon. Illumina priced $650 million of five-year convertible notes at the midpoint of talk with an initial conversion premium of 40% on Aug. 16. The $100 million greenshoe was later exercised, lifting the deal to $750 million.

The deal was marketed with a credit spread of 85 bps over Libor and a 35% vol., which modeled rich, sources said.

There was some pushback on the vol. assumptions from hedge participants but strong demand from outright players who know and like the biotech company’s story, a market source said.

The deal was catered to outright players in need of investment-grade paper, which is driving demand for the notes, a market source said.

“It’s trading extremely rich and will continue to trade rich,” a market source said.

Illumina’s 0.5% convertible notes due 2021 and 0% convertible notes due 2019 also remained active on Tuesday.

The 0.5% notes were seen changing hands at 139.34 versus an equity price of $332.54 in the late afternoon with about $7 million of the bonds on the tape.

The notes were trading about 8.5 points above parity on Tuesday. Illumina’s offering put some pressure on the 0.5% notes, which were trading with about a 10-point premium in the run up to the convertible note offering.

Illumina’s 0% convertible notes due 2019 were seen trading at 132.135 versus an equity price of $330.97 with about $6 million of the bonds on the tape by late afternoon. The notes continued to trade about 2 points above parity.

Illumina stock closed Tuesday at $331.35, an increase of 1.64%.

Lam Research active

Lam Research’s 2.625% convertible notes due 2041 were active on Tuesday as the issue was dropped from the Thomson Reuters convertibles indices.

The 2.625% notes were trading largely at parity. They were seen changing hands at 524.17 versus a stock price of $174.38 with about $12 million of the bonds on the tape.

Lam Research stock closed Tuesday at $174.39, an increase of 1.82%.

Mentioned in this article:

Cree Inc. Nasdaq: CREE

Illumina Inc. Nasdaq: ILMN

Lam Research Corp. Nasdaq: LRCX

MercadoLibre Inc. Nasdaq: MELI

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